Markets Hit Record Highs: What Causes The Next Leg Up?

Good Morning Investors,

Market resilience continues to astound skeptics as major indices notch consecutive all-time highs, with the S&P 500 closing at 6,694 and approaching the psychological 6,700 milestone. Goldman Sachs' target raise to 7,200 validates aligns with my constructive outlook, though I maintain my disciplined 6,800 year-end target while monitoring for tactical consolidation opportunities.

Futures suggest modest consolidation following Monday's record-setting performance, with pre-market activity reflecting healthy profit-taking rather than fundamental deterioration. The S&P's ($SPY ( ▲ 0.16% )) 0.4% gain and Nasdaq's ($QQQ ( ▼ 0.1% )) 0.7% advance demonstrate sustained institutional commitment despite elevated valuations.

Today's economic calendar features S&P Global PMI data for September, providing crucial insights into manufacturing and services activity. Chair Powell's 12:35 ET remarks in Rhode Island, alongside Vice Chair Bowman's morning commentary, will offer additional Fed policy clarity following Governor Miran's dovish positioning yesterday.

While the S&P 500 trades at dot-com era multiples with a 40x trailing ten-year P/E ratio, forward-looking metrics support continued optimism. Corporate America has proven it's ability to maintain historically high profit margins through the Covid pandemic disruption, the 2022 inflation cycle, and the current tariff scares, which demonstrates operational excellence that justifies premium valuations.

The path forward requires 13.4% earnings growth in 2026 and 15% in 2027 to maintain current multiples. This appears achievable given AI-driven productivity gains, broadening margin expansion beyond Big Tech, and labor market softening that reduces wage pressure while maintaining consumer resilience.

S&P 500 companies have announced nearly $960 billion in buybacks year-to-date, with large banks holding an additional $106 billion in authorized repurchases. This represents sustained technical support independent of external flows, creating a floor during volatility while amplifying gains during strength.

Upcoming bank earnings should demonstrate strong fundamentals supporting continued capital return programs. The combination of net interest margin stability and credit quality maintenance positions financials as both earnings contributors and buyback engines.

Monday's developments underscore technology's structural advantages rather than speculative excess. Nvidia's ($NVDA ( ▲ 1.18% )) $100 billion OpenAI partnership, representing the "biggest AI infrastructure project in history," demonstrates how dominant market positions create self-reinforcing competitive moats.

Apple's ($AAPL ( ▲ 3.17% )) move into positive territory for 2025, joining Tesla ($TSLA ( ▼ 1.63% )) from last week, completes the Magnificent Seven's return to form. This broad-based tech strength, combined with semiconductor recovery extending to second- and third-tier players, suggests durable hardware demand beyond headline names.

Oracle's ($ORCL ( ▼ 3.85% )) 6% Monday surge following TikTok deal confirmation and new co-CEO structure exemplifies how AI positioning drives multiple expansion across the sector.

Governor Miran's Monday comments advocating for additional 200 basis points of cuts, while larger than the amount that I see, aligns with the overall thesis that the Fed will continue to be more accommodative which will springboard markets. While today's Powell remarks and Bowman commentary may provide tactical volatility, the underlying labor market softening narrative supports continued easing.

Money market fund balances decline from 5% yields should provide gradual equity inflows, though we avoid overestimating this impact given wealth accumulation motives. More significant will be business confidence recovery once ISM Manufacturing exceeds 50, signaling hiring acceleration and retail participation.

Small-cap outperformance since April reflects rate sensitivity benefits, though momentum paused last week. We expect renewed leadership as lower rates benefit higher-leverage business models, particularly given Russell 2000 technical breakout above four-year base.

Homebuilder weakness following strong rallies represents pull-forward effects rather than fundamental deterioration. Housing market recovery potential remains intact with mortgage rates near yearly lows.

Micron Technology's Tuesday results provide crucial AI-driven memory demand insights. Management's recent guidance raises suggest robust data center buildout acceleration, though valuation requires execution delivery.

AutoZone and THOR Industries round out corporate reporting, offering consumer discretionary and recreational vehicle demand perspectives during economic transition.

I maintain my 6,800 S&P 500 year-end target and maintain my 7,000 target by mid 2026. Near-term consolidation remains probable following consecutive record highs, creating strategic entry opportunities rather than cause for concern.

Companies demonstrating AI integration, domestic exposure benefits, and operational excellence should outperform pure momentum plays as policy uncertainty persists.

Ethereum's is expected to, and needs to hold above $4,000 with potential rally to $5,500 reflects institutional adoption through ETF flows. Monday's volatility represents healthy deleveraging rather than fundamental deterioration, creating tactical opportunities for quality digital assets.

I continue to believe that Q4 will be bullish for crypto due to the rate cutting environment and the strong seasonality in Q4. I expect Bitcoin to break out of its holding cycle and move higher into year end.

Short term volatility remains and pullbacks offer entry points.

Market resilience defying traditional seasonal weakness validates my constructive positioning while highlighting the importance of selectivity during extended valuations. The combination of corporate buyback support, earnings growth expectations, and Fed accommodation creates multiple upside catalysts.

Goldman's target raise to 7,200 acknowledges momentum sustainability, though I maintain disciplined targets allowing for consolidation opportunities. Use any near-term weakness as strategic positioning ahead of what should prove a strong Q4 earnings season and continued AI-driven productivity gains.

The fundamental case for equity strength remains compelling as operational excellence meets accommodative monetary policy in an environment where cash alternatives grow less attractive.

Dan Sheehan

[email protected]

This newsletter is for informational purposes only and should not be considered investment advice. Please consult with your financial advisor regarding your specific situation.

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